Top-Hat Plans

Another type of nonqualified deferred compensation plan is the supplemental executive retirement plan (SERP). These nonqualified deferred compensation plans are also commonly referred to as top-hat plans because they are used to provide deferred compensation for a select group of top management or highly compensated employees.

In contrast, an excess benefit plan is not restricted to such a select group of employees. Further, a top hat plan can be used to provide deferred compensation beyond the amounts deferred under an excess benefit plan.

Tip Top-hat plan benefits, like excess benefit plan benefits, often accrue and vest at the same rate as an employer's qualified retirement plan. As a result, top-hat plans are also frequently referred to as supplemental retirement benefit plans.

A top-hat plan may be either unfunded or funded by the employer. From the employee's standpoint, an unfunded plan means that the employee assumes the risk that the employer may later refuse to pay benefits owed under the plan due to a merger, acquisition, insolvency, or other reason. An employee pays tax on the employer's unfunded top-hat plan contributions when the benefits are actually distributed or made available to the employee. If the plan is funded, however, an employer's contributions are includible in an employee's income in the year that the contributions are made.

Tip Even though an unfunded top-hat plan is not a sure thing for the plan participant, an employer may still assure that funds are available by using financing vehicles like a rabbi trust, corporate owned life insurance (COLI), or a secular trust.

Similarly, an employer generally may not deduct contributions to a top-hat plan until the benefits are actually distributed or made available to the employee, which varies depending on whether the plan is funded or unfunded. With a funded plan, the employer is also subject to ERISA's participation, vesting, funding, fiduciary responsibility, and plan termination insurance rules.

In addition, a top-hat plan, even if unfunded, is subject to ERISA's reporting and disclosure requirements. Those requirements will be met if the plan administrator files a statement with the Secretary of Labor that includes all of the following:

• the name and address of the employer
• the employer's IRS identification number (EIN)
• a statement declaring that the employer maintains the plan or plans primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees
• a statement listing the number of such plans and the number of employees in each

The plan administrator must also provide plan documents to the Secretary of Labor upon request to the extent such documents exist.